Employer Further Guide to PAYE and NICs - HM Revenue & Customs

Tips, gratuities, service charges and troncs
A tip or gratuity is an uncalled for and spontaneous
payment offered by a customer either in cash, as part of a
cheque payment, or as a specific gratuity on a credit/debit
card slip.
A service charge is an amount added to a customer’s bill
before it is presented to the customer. If it is made clear
to the customer that the charge is a purely discretionary
amount and that there is no obligation to pay, the
payment is a voluntary service charge. Where that is not
the case, the payment is a mandatory service charge.
To establish the correct PAYE and NICs treatment of the
payments described above, you must identify both the
nature of the payment and the arrangements under which
it is paid.
PAYE is not due if cash tips are received directly from
customers by your employees and are retained by them,
and the monies never pass through your hands. Such tips
are, however, taxable directly on the employee who should
tell us the amounts they have received.
For PAYE purposes
If, as an employer, you operate a scheme that pays
your employees a share of tips/gratuities (including
cash tips received by employees and handed to you by
the employees for sharing) or service charges (whether
voluntary or mandatory) you must include the amount
paid to each employee in their gross pay and deduct
PAYE accordingly.
PAYE and tronc schemes
A tronc is a separate organised pay arrangement used to
distribute tips, gratuities and service charges. You must
tell us when you first become aware of the existence
of a tronc, telling us the troncmaster’s name and the
arrangements in place.
If HMRC are satisfied that there is a tronc scheme for
sharing tips/gratuities and service charges then we will
set up a PAYE scheme in the troncmaster’s name. The
troncmaster is responsible for operating PAYE on all
payments made from the tronc, including any share of
cash tips. The word ‘tronc’ should be written in the space
for the works number on the employee’s form P11 End of
year summary and any forms P46 or P45 Part 3 which the
troncmaster should prepare.
For NICs purposes
If you impose a mandatory service charge and the money
is paid out to your employees, NICs are due on the
payments no matter what arrangements are in place to
share out the money.
If your employees receive tips/gratuities/voluntary service
charges you should use the flowchart right to decide if
NICs are due.
Where NICs are due, the responsibility for working out and
recording the NICs will always be yours, as the employer.
If a troncmaster makes a payment to your employees on
which NICs are due, make sure you:
• know the amount being paid and the date(s) of
payment, and
• include the payments in gross pay when working out
NICs, and
• show these payments on the employees’ forms P11.
The troncmaster should record the amounts on which NICs
are due separately from any tips or gratuities on which
NICs are not payable.
If you are not satisfied with the arrangements, it may be
advisable to:
• share out the payments yourself, or
• get the formula for sharing out the payments put into
the job contract.
It may also be advisable if you take responsibility yourself
for paying all earnings to any employee whose basic pay is
not enough for full deductions of PAYE and NICs to
be made.
More detailed guidance can be found in booklet
E24 Tips, Gratuities, Service Charges and Troncs. A guide
to Income Tax, National Insurance contributions, National
Minimum Wage issues and VAT.
48 Tips/gratuities/voluntary service charges
flowchart
Tips paid by the customer
Does the employee keep the tip without
involving the employer or tronc?
Does the employee have a contractual
right to a precise amount of money
sourced from tips and receives no more
or less than they are contractually
entitled to?
27 Chapter 2 CWG2(2012)
Yes
Yes
NICs are due
No
No
Does the employer decide which
employees will get the money and how
much each employee will get?
No
Yes
No NICs are due